What Should You Pay Tithing On?

[Editor’s note: This is a guest post by James M. Dahle, MD. He blogs at The White Coat Investor, and also wrote “The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing.”

When it comes to tithing, my belief aligns with the 1970 First Presidency letter on the subject: “Every member of the Church is entitled to make his own decision as to what he thinks he owes the Lord and to make payment accordingly” (page two on the right side in the link).

Dahle’s post was a fun read for me because it’s coming from an analytical mind. I prefer a much more simple approach, but these are some interesting things to consider.]

I have been writing a blog where I help doctors and other high-income professionals stop doing dumb things with their money for the last six years. It is the most widely read physician-specific personal finance and investing website in the world.

Over that time period, many of my readers have figured out that I’m Mormon. As such, they ask me for my thoughts on tithing. I suspect I have spent more time thinking about tithing than anyone else on the planet.

The only discussions I ever see in both Sunday school classes or on the internet seem to center around the gross versus net question. However, tithing can be way more complicated than that. In fact, it can be so complicated, that every time I think about it I see the wisdom in the common recommendation that it’s between you and God.

That recommendation is where I will start and finish this discussion. In the middle, we’ll dive deep into the topic and discuss some questions you’ve probably had and probably a few you’ve never thought about.

The basics of tithing

A tithe is 10% of your income that you pay to the church. It pays for things like:

Chapels

Temples

Printed materials

Church employee salaries

Other expenses required to run a worldwide church

For the devout Mormon, a tithe is a commandment. If you don’t pay your tithing in full, you can’t go to our most sacred of buildings, the temple.

However, tithing comes with a promise. As God said through his prophet Malachi:

Bring ye all the tithes into the storehouse…and prove me now herewith…if I will not…pour you out a blessing, that there shall not be room enough to receive it….I will rebuke the devourer for your sakes, and he shall not destroy the fruits of your ground….and all nations shall call you blessed.

So, tithing is a commandment, and we can expect to be blessed for keeping it.The implication seems to be that the blessing is both temporal and spiritual.

Sunday school is full of stories of latter-day saints who paid their tithing despite financial challenges and then were rewarded financially for doing so. And if that isn’t enough of a blessing, it also serves as fire insurance in the second coming, as noted in Doctrine and Covenants 64:23.

Extra tithing = extra blessings?

If you’ve been in the church for a long time, what I’ve written above probably isn’t new to you. What I’ll cover from here probably is. Note that tithing has repeatedly been defined at 10%. Pay 9%, you aren’t obeying the commandment. Pay 11%, no extra blessings. It’s 10%. So for a Mormon, calculating 10% tends to become somewhat of an exact science. Most Mormons calculate their tithing to the dollar, if not the penny.

Your benefits

Here’s something you W-2 employees out there have probably never thought about. Your employer likely offers some benefits. Maybe a retirement match, a flexible savings account, life insurance, disability insurance, “free” meals, or health insurance. Your employer also pays half of the payroll tax (Social Security and Medicare) as well as unemployment tax.

Are those a business expense or are they part of your salary? If you bought those things on the open market, you would be doing so with post-tax (and presumably post-tithing) dollars. So why does the fact that your employer gives them to you change how much you pay in tithing?

In this respect, a self-employed Mormon is at a disadvantage. I doubt any employed person is adding the employer half of his Social Security taxes back to his gross income before calculating his tithing, much less the unknown employer portion of his family’s health insurance premium.

So perhaps the self-employed person should be subtracting those costs out of his gross income before calculating his tithing. I also haven’t paid tithing on free meals and similar benefits, mostly just because of the hassle factor of doing so.

Social Security

If you are paying tithing on your Social Security and Medicare taxes, do you also plan to pay tithing on the benefits? I don’t. That’s not an increase; that’s just getting my money back. (Yes, I know the Social Security calculations are complex and you may be getting back more or less than you paid in, even when adjusting for the time value of money.)

Insurance premiums and benefits

Here’s another dilemma when you start spending too much time thinking about tithing. In general, when you pay the premiums on an insurance policy with pre-tax dollars, the benefits are taxable. If you pay with post-tax dollars, the benefits are tax-free. If we’re only paying tithing on increase, that’s probably the way it ought to work.

So do you deduct your insurance premiums from your income before calculating tithing and then pay on any benefits received, or do you pay with post-tithing dollars and accept the benefits tithing-free? I’ve chosen to do the latter, mostly just because the accounting is easier!

Retirement accounts

When I started earning money and using retirement accounts, I realized it would be crazy difficult to keep track of my tithing basis for contributions. So I decided to just plan to pay tithing when I take money out of retirement accounts like 401(k)s and Roth IRAs.

I look at it as deferred salary (even if it is a Roth account.) Contributions to those plans are basically tithing “deductions” on my tithing spreadsheet. I’ll pay on it when I take withdrawals from it.

Coverdell Education Savings Accounts and 529s

I took a similar approach to education savings accounts. However, they bring in an additional complication. You’re only allowed to take out, at least tax and penalty free, an amount from the 529 or Coverdell as what was spent on legitimate educational expenses. There’s no allowance for an extra 10%.

I have not yet figured out how to deal with that other than the fact that I don’t plan to pay for every single dime of my children’s education using 529 money. So I should have the educational costs to pull a little more out of the account because the kid’s or my own earnings will be paying some of the cost. Or more likely, I can just make it up with other income.

Health savings accounts

These triple-tax-free accounts are pretty awesome. But they have the same issue as a 529: You can only make withdrawals tax and penalty free the same amount of money as you spend on health care. In other words, you can’t take out an extra 10% to pay tithing.

If it’s a small part of your income, no big deal. If you pull out $100,000 to pay for some crazy experimental medical treatment your insurance won’t cover, however, finding $10,000 to pay tithing with might be a little tougher.

Capital gains and losses

Part of the issue with capital gains is that, especially for something you’ve owned for a long time, a large part of those capital gains are just inflation. That’s not really an increase at all. So I actually adjust my capital gains for inflation before calculating my tithing. I also subtract my capital losses from my income before calculating my tithing.

Owned a house for 20 years and it doubled in value? If inflation went up 50% in that time period, perhaps you should only pay tax on 25% of the house value. What about significant home improvements? Should they be added to your tithing basis just like they would to your tax basis for a rental property? Maybe they should, although I can’t say I’ve ever done that.

Other random bits of increase

What about other stuff, like scholarships or grants? Or the fact that two-thirds of the cost of education at BYU is paid by tithing. Or that your degree at a state university is subsidized by your state? What about birthday gifts and Christmas presents? What if you don’t know what the present cost? What about credit card rewards points, free miles for signing up for a credit card, or a voucher given to you for missing your flight?

I don’t typically tithe on any of these things. It’s just too big of an accounting hassle. I think the Lord understands.

The best way to pay tithing

The best way to pay tithing is to donate appreciated shares from a taxable (non-qualified) account directly to the church. The “in-kind donations” office takes care of all that, and the church has an account at every major brokerage or mutual fund company that makes the share transfer easy.

The benefit of doing so is that you don’t have to pay capital gains taxes on those shares and neither does the church. But you still get to deduct the full value of the donation on Schedule A. Cool trick, eh? Of course, don’t forget to pay tithing on the inflation-adjusted increase in value of those shares!

How often to pay tithing

You visit with your bishop once a year for tithing settlement, so I see no reason to pay more than once a year. It makes for some really big tithing checks (unless I’ve donated shares that year) but it sure makes for easier bookkeeping.

Just don’t raid that tithing fund for some other expense during the year. You might need that fire insurance! Of course, be sure to pay tithing on the interest earned by that money during the year.

Marginal tax + tithing rate

Your marginal tax rate is useful for determining all kinds of things. For example, at very high marginal tax rates many of us decide to work less. It just isn’t worth it when 46% of everything you earn goes to the government. For a Mormon, some of those decisions should be made by adding your tithing rate to your tax rate. Now 56% of the next dollar you earn goes somewhere else.

Well, not entirely true, since you can probably deduct a good chunk of that tithing check against your taxes, so maybe it’s only 51%. But either way, Mormons, despite their Sunday school lessons on industry, service, and work, have more incentive than others to earn less.

Tithing can be complicated

Now you can see the wisdom in “it’s between you and God,” right? So as you come upon these decisions in your financial life, figure out what you would feel fine about if you were handing your check directly to God, and then don’t feel a bit bad declaring yourself a full tithe payer. Most of your ward probably hasn’t considered half of this stuff in calculating their tithing donation.

What do you think? How do you calculate your tithing? Do you agree or disagree with what I’ve written? Comment below!

About Ben Luthi

Ben started Latter-day Finance because he's passionate about helping people better manage their money. He has been writing about money since 2013 and learning about it since long before that. He currently writes full-time for Student Loan Hero and has a freelance writing business on the side.

Comments

I follow a very similar approach in determining my tithing by deferring paying tithing on social security and retirement contributions. Some great things to think about in here! My rental property that has been a big loss in the past and only now making some income gives me some food for thought on tithing…do I offset my past losses against these gains because I’m really not ahead overall?…

I think in the end, you’re right that God will understand if we’re paying our tithing to the best of our understanding.

I think Ben was saying he will defer his retirement investments to when he withdraws them but not SS. If I follow right he tithes on the SS deductions (I assume SSI and Med.) and then won’t tithe on them when he receives those benefits. I do the same with retirement and other investments, but I am struggling on what to do with SS since both myself and my employer contribute to that 50/50. I’ve always paid on my entire gross less retirement contributions directly from me. Since my employers have also contributed to my retirement accounts it’s very hard to calculate unless you defer. I will probably figure out how much total I have contributed personally to SS then not start paying on “my increase” until payments exceed what I put in. I have tithed on 50% of my SS contributions. I should probably start deducting those “taxes” from my gross income? However I’m paying tithing on my other “taxes” and not deducting those (I.E. I don’t see those as “deductions” from income, so….this all hurts my head. I guess if I pay 10% on SS payments when I receive them then that will make up for the 50% employer payments that I did not tithe on and the benefits I will receive (hopefully) from Medicare? My wife was self employed for a few years and we paid 10% on her total gross (which would include, so what about that?

I had a friend of middle-income who would pay his tithing every-other year and then only itemize deductions in those years that he paid tithing. This was recommended to him by his Stake President who was his accountant.

I like your insights and information on tithing. Unfortunately, not every leader recognizes the 1970 direction of the first presidency for every member to determine what constitutes a full tithe and pay accordingly. My bishop considers anything less than tithing on gross income as not being a full tithe. He believes this so much that my recommend was revoked until I would start paying on gross rather than paying on net. I am not kidding, worthy in every other way (served in 2 bishoprics, high priest group leader, etc).

Jesus said to render unto Caesar that which is Caesars. To me this means we calculate the value of money according to the currency which we use. In the USA this is fairly simple. When I took a tax class in college, we learned that taxes are expected to be paid on all income, from whatever source derived. And then the deductions and exclusions start. I am thinking that this means that paying on our Adjusted Gross Income on our annual tax return is a pretty good calculation of what is income in the USA

As for your question, we learn the following from the 1970 First Presidency letter: “The simplest statement we know of is the statement of the Lord himself, namely, that the members of the Church should pay ‘one-tenth of all their interest annually,’ which is understood to mean income.”

Income is typically defined as money you receive from work or investments. Based on that, I personally wouldn’t consider life insurance proceeds to be titheable (is that a word?).

That said, the First Presidency letter also states that “Every member of the Church is entitled to make his own decision as to what he thinks he owes the Lord and to make payment accordingly.” So in the end, it’s between you and God. If you feel like you should, do it. But based on that First Presidency letter, I see no reason to feel guilty about not paying tithing on it.

Hmmm – when using appreciated shares to pay your annual tithing, do you determine what you would pay in cash for the year first, and if the same amount available as appreciated shares, proceed with that process? What if the appreciate shares for the year is less than your total tithing due? Pay difference in cash?

Whatever works best for you. This option would definitely work best if you know what amount is “due” for the year. But even if you pay a portion of it with cash, you still get the tax benefits on the appreciated shares you did donate.

I appreciate the idea about paying every other year and not itemizing on the year that you don’t pay. This will come in rather handy with the new tax law coming out. I plan to pay for this year on December 31st 2017. Then I won’t make a payment until January 1st 2019, then another December 31st 2019. The first will be for 2018, then 2nd for 2019. I will then itemize for 2019 but not for 2018 since the “standard” deduction will be way more than what it will be if I itemize and then it will put me way over the top for 2019. I hope this makes sense. I wish I knew about this trick long ago and I would have done it. Not sure what difference it would have made then, but with the new laws that will be around for around 5 years, unless changed again will make a big difference here. I wonder how many people will stop paying tithing and giving charitable contributions since they won’t get a tax benefit unless they go over the standard deduction. Need to do some googling to see if folks have picked up on that.

That’s a great question and I think this is where the counsel in the First Presidency letter is critical. If it were me, I wouldn’t consider it an increase if it’s not enough to cover your basic expenses. But others consider any type of income as an increase, so it really depends on what you feel comfortable with based on your relationship with the Lord.

I’ve been reading your blog for the last couple months, I am graduating this year and looking forward to having a retirement and getting out of debt.
One job I am looking at has a loan forgiveness and I realized not only do I have to save my from my net to pay taxes on that but I didn’t even think of paying tithing on the forgiveness. I have come to many of the same conclusions as you have about tithing but as I thought about this situation I started to wonder about paying tithing on loan repayments at all. I understand if I bought a house I would and do for my car payment but something seems off about a student loans and tithing. I didn’t pay on them when I got them. I am where I am thanks to the loans (and I believe I am where I am thanks to me paying tithing as well), but paying on them it doesn’t feel like an “increase” or “income”. Sure an extra $400+ a month sounds nice and could pay down the loan quicker but that’s not what it is. I can’t put my finger on it. Maybe it seems like it’s a tax still especially with the nearly 7% interest. I don’t know. I was wondering if you had any insight on this I maybe missing or if I am just completely off on this.

Hello and welcome! I'm Ben and I run Latter-day Finance. I've been eating, sleeping, and breathing personal finance ever since I first picked up Dave Ramsey's Total Money Makeover in 2009. I believe that managing money well is essential to a fulfilling life. Learn more about me here.

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